Monday, 11 February 2013

Transforming the housing market through green mortgages

New Affordable Housing in Medellin, Colombia
What are the three most significant factors that contribute to home property values?  The response is accompanied with a wink:  “location, location, location.” But while a home close to public transportation, good schools, and medical care should be valued higher than a relatively isolated home, its value does not reflect energy efficiencies and their resulting lower costs and environmental benefits. Sustainable homes currently do not attract favourable lending terms or result in higher property values, but the green mortgage industry has the potential to change this – as long as there is buy-in from governments, developers, banks, and home owners. 

 A green or “energy-efficient” mortgage allows the homebuyer to borrow extra money to pay for energy-efficient upgrades to an existing home or to purchase a new green home with efficiencies already in place. The home’s lower energy and water bills increase a borrower’s available net income, allowing for either a larger loan than would be otherwise possible or a discounted interest rate. Since owners of energy-efficient homes spend less per month on utility costs, they theoretically have more to spend on monthly mortgage payments.

Home buyers who are naturally motivated to purchase a green home care about the environment and/or view their newly acquired property as a status symbol. More households would be likely to invest in energy-efficient housing if there were a clear financial benefit to them, in terms of lower energy bills, higher property re-sale values, or tariff income.

Developers, on the other hand, see green homes as a way to improve their corporate image and achieve market place distinction, although the current low demand makes quicker sales elusive. Developers typically find it difficult to capitalize investments in green measures, as they are unable to transfer additional costs to the total price of the energy-efficient homes.

On the banking side, most mortgage providers have not acknowledged green homes as an ‘asset class’ and don’t provide a green mortgage product to the mass market. One of the main reasons is consumer demand is not high enough to make the product offering attractive. 

Current systems, practices, and regulatory frameworks for valuing properties and advancing loan finance do not enable consumers to place a priority on owning a sustainable home. Each of these factors influences the others, so without change of some kind, they could be self-perpetuating.[1] Ensuring that the market fully reflects the benefits of green housing is therefore vital in encouraging households to take up the measures needed to achieve emission reduction and lower fuel poverty.

There are examples of innovative thinking leading to rapid scale up. Since Mexico’s housing development agency, the Institute for the National Workers’ Housing Fund (INFONAVIT), launched its green mortgage program for low income housing in 2007, more than 600,000 green mortgages have been granted, benefiting approximately 2.4 million people. While a subsidy was provided to more than one-third of the home-buyers, once the value of green homes is better known and understood, subsidies such as that offered by INFONAVIT will no longer be needed[2]

Case Study: INFONAVIT Green Mortgage Program
    A green mortgage program was developed in 2007 by the Institute for the National Workers’ Housing Fund (INFONAVIT) in Mexico to encourage the use of energy efficient systems and technologies for low-income households.
      Families purchasing homes through INFONAVIT receive a credit of up to US$1,250 to cover the cost of eco-technologies (such as solar hot-water, low-energy lighting, water saving faucets, and thermal insulation).
      Developers are encouraged to build homes with energy-saving materials and technologies, and the low-rate mortgage enables families to save on their utility bills while paying for an increase in their monthly mortgage payment.
      INVONAVIT established that the environmental technologies installed per home should generate a minimum savings of $215.00 pesos.
      Between 2007 and 2011, more than 600,000 green mortgage credits have been granted, benefiting approximately 2.4 million people. A subsidy was provided to 38% of the homes.
      The success of this program and the continued demand for green mortgages has led to INFONAVIT to declare all their mortgages to be green.
While banks are instrumental to driving growth in the green mortgages industry, they also stand to benefit from enhancing their suite of products. Banks offering green mortgages reduce their risk by ensuring homebuyers have lower monthly bills. Green mortgages result in improved loan performance, since socially-responsible homeowners tend to have better on-time payment records. Banks can also target existing customers with a good track record for retrofitted properties. Finally, banks providing green products benefit from better image branding.

In order for lenders to recognize the value of a property’s green measures, large-scale adoption of a universal green performance standard for homes is required. The standard needs to be defined by a labeling system that is inexpensive and simple, with a sharp focus on areas of cost savings. The standard needs to be supported by a well-understood calculator that can benchmark and measure energy and water savings. Both the labelling system and standard need to dovetail with a certification program that brands the property green while verifying the technical measures that have been implemented. EnergyPerformance Certificates in the UK are a good example of an effective labeling system but very few countries have anything close to this. 

Existing Green building rating systems are too lengthy and expensive to beadopted as a mass market system, especially for clients in developing countries. This limits the number of prospective builders/owners adopting Green Building strategies.

EDGE certified Affordable Housing in the Philippines

On the regulatory front, financial incentives must be made available to improve the energy-efficiency of homes. Central banks that refinance Housing Finance Companies (HFC) need to be persuaded, and regulatory barriers must be adjusted to allow leverage on existing subsidy thresholds (such as on the value of affordable homes).

Green homes can become a significant proportion of the housing market if supported by banks that offer green mortgages as a new asset class, with trained loan officers advising homebuyers of the merits. As awareness is raised and success stories are publicized, green mortgages will generate increased response from developers, so that more sustainable homes are offered. In this way, a circle of demand will be created that leads to greater home value, more affordability for the homeowner, and reduced impact on the environment.

Also read Banking on Green Buildings, which discusses the value proposition for financial institutions

[1] Homes that don't cost the earth: a consultation on Scotland's Sustainable Housing Strategy, Pg. 6,
The Scottish Government, UK 2012


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Francis D. Harp said...

nice post